How can an
or a financial adviser avoid sharp sell-offs and deftly
outperform the stock market? IBD's ETF Market Strategy, a new
, can help.
The ETF Strategy chart, which runs every day on the ETFs page
(today on A13), shows one source of its outperformance. Focus on
the time period of 2007 to early 2009 in the graph. While the
Nasdaq composite and the S&P 500 dived as stocks in all
sectors sold off, the IBD ETF strategy, which emphasized a 100%
cash position, sustained a much milder drop.
When distribution -- notable declines by the major indexes in
higher volume in the relevant exchange -- is heavy, the Market
Pulse in IBD's Big Picture column switches the outlook to "Market
in correction." It's time to sell stocks and ETFs, avoid new buys
and wait for better conditions.
If the market condition does not improve, cash becomes an even
more strategic position.
The strategy is based on careful study of more than 27 U.S.
bull and bear
stock market cycles
. It employs daily analysis of the stock market's
price-and-volume action .
The best time to invest in stocks? When you confirm that the
market is in an uptrend -- when as many as three of four stocks
follow the market's path.
Traders who use a broad index ETF, such as SPDR S&P 500ETF
) or iShares Russell 2000Index (
), may decide to go 100% invested (within their assets allocated
toward equities) when the Market Pulse outlook says "Confirmed
Ideally, one should buy shares on or soon after the day that a
follow-through occurs after a significant market decline. A
follow-through is a significant gain -- typically during Day 4 to
7 of a new market rally attempt -- in higher volume by one of the
key stock-market indexes.
When Outlook Changes
After a rally has been underway, selling eventually
intensifies. Distribution days crop up over a short period. At
some point, IBD will downgrade the outlook to "Uptrend under
When this happens, cut your ETF exposure to 50%. You're
locking in gains and raising cash, yet also leaving the door open
for the rally to continue. If the decline worsens, the outlook
may go to "Market in correction." The right move is to sell the
remaining shares and go 100% cash.
On May 4, 2011, IBD switched the current outlook from "Uptrend
under pressure" to "Market in correction" after the Nasdaq fell
0.5% to 2828.23 in higher turnover. The key index also got tagged
with a second straight distribution day. Leading stocks, as in
the IBD 50, were sinking fast. The correction signal meant that
portfolio managers should have sold their stock index ETF
positions and stayed put.
From May 6 to 10, the Nasdaq rebounded three days in row but
failed to take out its recent high of 2887.75. Then the market
began to buckle. By mid-June, the Nasdaq was down 10.2%.
The market rebounded. The S&P 500 marked a Day 4
follow-through on June 21. But the rally lasted just two weeks.
New distribution days mushroomed. On July 11, the Nasdaq fell
1.8% in higher volume, knocking the outlook from "Confirmed
uptrend" to "Uptrend under pressure."
On July 27, the Nasdaq slid 2% and poked below its 50-day
moving average again. IBD changed the outlook back to "Market in
correction." It was time to be in cash.
By Oct. 4, the Nasdaq had fallen to 2298.88 -- a 20.3% decline
that was large enough to call a bear market, albeit briefly.
Let's say you devoted $100,000 to the Market Pulse strategy on
July 27. Since the Market Pulse noted that the market was in
correction, you would have zero positions in any index ETF. By
Oct. 4, your $100,000 would have been untouched. A flat return
doesn't sound exciting; but if you had all of that money invested
in the S&P 500 and ignored what the market was doing, that
stake would have shrunk to $86,130, down 14%, plus any dividends